Starting a limited liability company (LLC) for your towing company can provide several benefits.
Most importantly, an LLC structure offers limited liability to its owners, which can protect their personal assets from lawsuits and creditors.
For a towing company, lawsuits can arise from things like damaging a car that you are towing, or one of your tow truck drivers getting injured while on the job.
LLCs are also affordable, highly flexible (from a tax point-of-view), and can make your towing company seem more credible.
Recommended: Use Northwest to form an LLC for $29 (plus state fees).
Do I Need an LLC for a Towing Company?
LLCs are a simple and inexpensive way to protect your personal assets and save money on taxes.
You should form an LLC when there's any risk involved in your business and/or when your business could benefit from tax options and increased credibility.
LLC Benefits for a Towing Company
By starting an LLC for your towing company, you can:
- Protect your savings, car, and house with limited liability protection
- Have more tax benefits and options
- Increase your business’s credibility
Limited Liability Protection
LLCs provide limited liability protection. This means your personal assets (e.g., car, house, bank account) are protected in the event your business is sued or if it defaults on a debt.
Towing companies will benefit from liability protection because of the risk of workplace accidents, property damage, and financial data breaches.
Example 1: After one of your tow truck drivers accidentally dents a car that they are moving, your towing company becomes the subject of a compensation lawsuit. Regardless of how the claim progresses in court, you will not need to personally compensate the claimant — even if your business is unable to — as long as your business is registered as an LLC.
Example 2: Right before starting to work, one of your tow truck drivers falls down, suffering from a mild head wound that ends up needing a few stitches. Even though this happened in your office’s premises, you refuse to offer any compensation as the driver had not technically clocked in for the day. If a lawsuit was to arise, your personal assets would remain protected from the claimant as a result of your limited liability in law.
Example 3: After failing to pay a business loan back on time, your towing company begins accruing significant debt. If a compensation lawsuit was to emerge, your personal assets would remain out of bounds to all creditors, regardless of whether your business was able to pay them back or not.
An LLC will also protect your personal assets in the event of commercial bankruptcy or loan default.
To maintain your LLC's limited liability protection, you must maintain your LLC's corporate veil.
LLC Tax Benefits and Options for a Towing Company
The business’s net income is then subject to income taxes (based on the owner's tax bracket) and self-employment taxes.
Sole proprietorships and partnerships are taxed in a similar way to LLCs, but they do not offer limited liability protection or other tax options.
S Corp Option for LLCs
An S corporation (S corp) is an IRS tax status that an LLC can elect. S corp status allows business owners to be treated as employees of the business (for tax purposes).
S corp tax status can reduce self-employment taxes and will allow business owners to contribute pre-tax dollars to 401k or health insurance premiums.
The S corp status requires that the business pay the employee-owner(s) a reasonable salary for the work they perform.
In addition, the business might need to spend more on accounting, bookkeeping, and payroll services. To offset these costs, you'd need to be saving about $2,000 a year on taxes.
We estimate that if a towing company owner can pay themselves a reasonable salary and at least $10,000 in distributions each year, they could benefit from S corp status.
You can start an S corp when you form your LLC. Our How to Start an S Corp guide will lead you through the process.
Credibility and Consumer Trust
Towing companies rely on consumer trust. Credibility plays a key role in creating and maintaining any business.
Businesses gain consumer trust simply by forming an LLC.
How to Form an LLC
Forming an LLC is easy. There are two options for forming your LLC:
- You can hire a professional LLC formation service to set up your LLC for a small fee
- Or, you can choose your state from the list below to start an LLC yourself
Select Your State
- Alabama LLC
- Alaska LLC
- Arizona LLC
- Arkansas LLC
- California LLC
- Colorado LLC
- Connecticut LLC
- Delaware LLC
- Florida LLC
- Georgia LLC
- Hawaii LLC
- Idaho LLC
- Illinois LLC
- Indiana LLC
- Iowa LLC
- Kansas LLC
- Kentucky LLC
- Louisiana LLC
- Maine LLC
- Maryland LLC
- Massachusetts LLC
- Michigan LLC
- Minnesota LLC
- Mississippi LLC
- Missouri LLC
- Montana LLC
- Nebraska LLC
- Nevada LLC
- New Hampshire LLC
- New Jersey LLC
- New Mexico LLC
- New York LLC
- North Carolina LLC
- North Dakota LLC
- Ohio LLC
- Oklahoma LLC
- Oregon LLC
- Pennsylvania LLC
- Rhode Island LLC
- South Carolina LLC
- South Dakota LLC
- Tennessee LLC
- Texas LLC
- Utah LLC
- Vermont LLC
- Virginia LLC
- Washington LLC
- Washington D.C. LLC
- West Virginia LLC
- Wisconsin LLC
- Wyoming LLC
For most new business owners, the best state to form an LLC in is the state where you live and where you plan to conduct your business.
Do LLCs Need Insurance?
All businesses need insurance to protect their business assets — even LLCs. This is because the limited liability protection from an LLC protects your personal assets, not your business assets.
Business insurance can protect your towing company’s assets from lawsuits that arise as a result of accidentally damaging vehicles while working. It can also help you maintain and replace your tow tracks through commercial property insurance.
Common Situations Business Insurance May Cover for a Towing Company
Example 1: A customer who is stressed about their car being undrivable gets too close during loading and has their hand pinched between the car and the equipment. General Liability Insurance would cover the resulting medical payments for the injury.
Example 2: During a routine pick-up, one of your employees forgets to secure a strap that would properly secure the vehicle being towed. This results in the car detaching from the truck which causes major damage to the car. General liability insurance would cover the damage done to the customer’s vehicle.
Example 3: While dropping off a vehicle at an auto shop, you accidentally back the customer’s vehicle into the garage bay door. General liability insurance would cover the damage to the customer’s vehicle and the auto shop’s garage door.
Other Types of Coverage Towing Companies Need
While general liability is the most important type of insurance to have, there are several other forms of coverage you should be aware of. Below are some other types of insurance all towing companies should obtain.
Commercial Auto Insurance
Since you will be driving your truck on public roadways, you are mandated by the state to carry a commercial auto policy. Commercial auto insurance protects not only your vehicle but any liability you may have in an accident. Your personal car insurance will not cover you if you are driving the tow truck, even if you are off duty.
Commercial Property Insurance
If you own your location instead of renting, you need commercial property insurance to protect the building. If your business is based out of your home, your homeowners' insurance will not cover the home when it is being used for commercial purposes. Property insurance also covers items owned by your business.
Towing companies invest heavily in the tools that are used to complete their work. Be sure that you have enough coverage to replace all of your tools in the case of a loss.
Workers' Compensation Insurance
If your towing company has any employees (full-time or part-time), you are legally required to carry workers’ compensation insurance. This type of coverage will help compensate your employees in the case that they get injured on the job.
Business Interruption Insurance
In the event of a fire, flood, or other catastrophes, there is a good chance your business operations will be halted for some time. Business interruption coverage is designed to help you recoup a portion of the revenue your business would lose due to the inability to operate.
This type of insurance is typically included in a business owner’s policy.
Commercial Umbrella Insurance
Umbrella coverage allows you to extend above and beyond the standard limits of your other business insurance policies. If you are faced with a large lawsuit or other claim situation, there’s a possibility that the coverage limits of your standard policies will be insufficient. In this case, your umbrella policy will allow you to surpass these limits.
Should I Start an LLC FAQ
Which is better for my towing company — an LLC or sole proprietorship?
Choosing the right business structure depends on your business’s unique circumstances and needs. However, unless your business is very low risk (like a hobby), an LLC is likely the better option.
Visit our LLC vs. Sole Proprietorship guide to learn more.
What are the costs to start and maintain a towing company?
You will need a substantial budget in order to start a towing company. This is because you will need to purchase at least one tow truck, which can sell for anywhere between $10,000 and $50,000. You will also need to acquire a Class B license, a permit from your state, and business insurance.
Visit our How to Start a Towing Company guide to learn more about the costs of starting and maintaining this business.
What are the ongoing expenses of running a towing company?
Some of the main operating expenses for a towing company include payroll, insurance, fuel, and truck maintenance.
Learn more about running a towing company.
How do towing companies make money?
Towing companies make money by charging to tow vehicles. Their customers can include individual vehicle owners, police and local government offices, and owners of private parking lots.
Learn more about starting a towing company.
What is a towing company and is it profitable?
In addition to breakdowns, tow trucks get business from illegally parked cars, both on public streets and in private lots.
Towing companies are easily scalable by adding more trucks. This means there is great profit potential and that you can start small to keep costs low. The average towing company owner makes between $30,000 and $40,000.
Learn more about starting a towing company.